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Sterling set to sail through choppy waters in 2018

At the end of November, sterling hit a two-month high agains..

At the end of November, sterling hit a two-month high against both the Dollar and the Euro on the news that Britain may have finally agreed its divorce bill from the European Union (EU).

But within days the thorny issue of what will happen to the Irish border after Brexit had replaced the money question as the biggest barrier to progress in Britain’s Brexit talks with the EU.

As a result the Pound endured a roller-coaster few days last week as the Irish border question at first derailed Brexit negotiations, only for Theresa May and the EU to make an eleventh hour breakthrough on Thursday night.

Such white-knuckle political developments provided a feast for headline writers but a chaotic backdrop for the currency markets – tipping sterling into a period of yo-yoing uncertainty.

But it’s not all bad news. Sterling ended the week on the front foot and is up by 5.5% against the Dollar so far this year. While it is still down 4.2% against the Euro this year, that represents a significant recovery in its fortunes given that it fell more than 15% versus the Euro after last year’s EU referendum.

So what now for sterling? Will it continue to recover through 2018? It isn't entirely impossible. If progress is made in trade negotiations with the EU, and markets start to believe Britain can exit Europe without its economy going to the dogs, confidence in the UK currency should return.

But there is more than one elephant in the room, according to most market watchers. How Brexit is handled is an obvious concern, but so too is the prospect of another general election.

Given the current weakness of the government, fresh elections in 2018 simply can’t be ruled out. Theresa May looks incredibly weak, battered by all wings of her own party and her “partners” the Democratic Unionist Party, let alone the Opposition.

Whatever your political persuasion, most independent analysts see Labour as a far less market-friendly political party – but also one with a real chance of winning power, given Labour’s 8-point lead in the most recent opinion poll.

What might a Jeremy Corbyn-led Labour party do to sterling? Some think the impact of a Labour win under Mr Corbyn could test the lows last seen after the EU referendum.

Even if the current government is weak and vulnerable, markets appear, for the moment at least, to want to stick with the devil they know. Whether they have much choice in the matter isn't yet entirely clear.

Either way sterling seems set for a roller-coaster of a ride next year, buffeted by political turbulence as much as by economic data.

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